Looking for what no state income tax in Texas really changes for an owner? The honest answer is less than most people hope and more than most people expect. Steven Palmieri, a Tax CFO, starts with what the missing tax removes and then lists what stays.
Texas has no personal income tax. So there is no state return for an owner's pay or for the profit that passes through to the owner. There is also no state withholding on a paycheck. That simplifies payroll setup, because the provider has one less state to handle. It does not simplify federal withholding or deposits, which apply exactly as they do anywhere.
For the owner, the income tax that matters is the federal one. Your return, your estimates and the timing of your income are federal questions, and the Texas layer is added beside them.
A company is still taxed in Texas. Most entities file the franchise report, which the page on franchise tax as a planning number covers. Sales tax applies to taxable sales, and property tax applies to what the business owns. An employer pays unemployment tax to the Texas Workforce Commission. Because Texas has no income tax, property tax and sales tax carry more of the load, so each deserves its own line in the plan. We do not compare Texas with other states, because a comparison depends on facts we have not seen about you.
An owner choosing between an LLC taxed as a sole proprietor, an S corporation and other forms is deciding about federal tax and franchise tax together. The federal side has its own rules about self-employment tax and owner pay. The Texas side asks whether the entity is taxable and how its margin is computed. Weigh them in the same sitting, using the year's real numbers. The legal choice of entity, and any conversion, belongs to an attorney, and we bring the numbers to that conversation.
An S corporation owner who works in the business is expected to take reasonable pay as an employee. That is a federal question. In Texas it has a franchise side too, because compensation can be a margin deduction, within limits the Comptroller sets each report year. So one number, the owner's salary, touches the federal return, the payroll filings and the franchise computation. We set it once, deliberately, with all three in view.
Say an owner draws $150,000 from a company that earned $320,000. The owner sets a salary, the company pays payroll taxes on it, the franchise computation sees the compensation, and the remaining profit passes through to the federal return. Each choice of salary moves the three. These numbers are an illustration only, and no result is promised. What a plan does is show the three effects side by side before the number is chosen.
The Texas date this page puts on your plan is the 20th of each month, when sales tax returns come due for monthly filers. With no state income tax, that return, along with the May franchise report, carries much of the state's weight.
Weigh your entity and owner pay with us on a free Second Look call. No paperwork and no payment. For what the missing tax does to hiring, read about hiring in Texas.
You will be talking to the Steven Palmieri practice.